Nigeria’s $58.4bn Oil Projects Face New Setback
The twin shocks of the coronavirus pandemic and an oil price war pose a new threat to big-ticket projects in Nigeria as international oil companies consider cutting capital spending this year.
The plunge in crude oil prices looks set to worsen project delay in the Nigerian oil and gas sector, which had yet to fully recover from the 2014-2016 oil slump that hit most operators hard.
Prior to this year’s oil price crash, several international oil companies operating in the country have failed to sanction a number of projects valued at $58.4bn years after they were announced.
Industry experts had said the regulatory and security challenges in Nigeria had continued to put a damper on the IOCs’ appetite to take final investment decisions on the projects.
Just as the 2014-2016 fall in global oil prices prompted oil companies to cut their capital expenditure budgets, several oil majors have again announced plans to curb their spending this year in response to the current market conditions.
“We may see quite a number of projects being suspended, if not outright cancelled, until the price has gone up to a level where they can justify the economies of such development,” the Chief Executive Officer of International Energy Services Limited, Dr Diran Fawibe, told our correspondent.
He said the oil service companies, which provide equipment as well as drilling and completion services to oil companies, would be badly affected by the suspension or cancellation of projects.
He added, “Already, there are some projects being undertaken by international oil companies that had been suspended. I know of a service company that will be laying off as many as 30 engineers following the suspension of the projects they were undertaking for the IOCs, and that will go round the whole industry.”
The price of Brent crude, the international oil benchmark, has fallen by over 50 per cent since the start of this year. It fell to $27.40 per barrel as of 2.05pm Nigerian time on Wednesday, down from as high as $70 per barrel in January.
The oil price tumbled by over 30 per cent on March 9, 2020 to a four-year low amid the eruption of a price war between Saudi Arabia and Russia, sending another shockwave through an industry already nervous over the spread of coronavirus that has hit worldwide demand.
On Monday, ExxonMobil said it would make “significant” cuts to spending in the face of the unprecedented slide in oil prices due to the global coronavirus outbreak, which sent its shares to a 17-year low.
It was a stunning reversal for the largest US oil producer, which two weeks ago pledged to “lean in” to the market drop and maintain outlays in a belief oil demand would rise in the long run.
“We are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term. We remain focused on being a safe, low-cost operator and creating long-term value for shareholders,” the Chief Executive, ExxonMobil, Darren Woods, said in a statement.
Chevron Corporation said last week that it was looking at ways to cut spending. The US company became the first global oil major to confirm it was reassessing its spending in the wake of the price collapse.
“We are reviewing alternatives to reduce capital expenditures that are expected to lower short-term production and preserve long-term value,” Chevron was quoted by Reuters as saying in a statement.
A research firm, Rystad Energy, predicted last week that total industry spending on oil exploration and production would be cut by $100bn this year and another $150bn in 2021 if oil prices remained around $30 a barrel.
“(Companies) will turn every stone and cancel every single non-revenue-generating activity,” Audun Martinsen at Rystad Energy said.
An energy expert, Mr Bala Zakka, said the Finance Act, 2019 and the recent review of the Deep Offshore (and Inland Basin Production Sharing Contract) Act by the Federal Government had already hit oil companies hard.
“They had concerns with the petroleum profit tax. In the 2019 Finance Act, the government of Nigeria is charging them about 10 per cent withholding tax on dividends. Some of the investors were already thinking about the likely options and actions to take before the effect of this global coronavirus pandemic hit them,” he said.
He said with the current downturn in the global oil industry, the oil companies would have no other option than to cut back on their investments in the country.
“Projects in deepwater, shallow water and onshore will be affected by the oil price slump. Once the cost of production per barrel is almost the same as the price at which they are going to sell, the natural thing will be to slow down or shut down operations,” Zakka added.
According to him, the IOCs operating in Nigeria take instructions from their parent companies, which are based in countries that have been badly affected by the coronavirus pandemic such as Italy and France.
As of the end of the first half of 2019, there were 46 oil projects under development across sub-Saharan Africa, with Nigeria accounting for a half of them, according to the Africa Energy Outlook published by Africa Energy Chamber last month.
In Nigeria, projects that have not reached the FID include Shell’s $9.7bn Bonga South-West/Aparo, which would add 143,274 barrels per day in extra crude production capacity at its peak flow.
Bonga South-West/Aparo has the potential to boost Nigeria’s daily production by nearly 10 per cent and would be the largest major deepwater project since Total’s Egina, which came on stream in 2019, according to the report.
The AEC noted in a recent report that Shell invited technical bids for phase 1 of the project in February this year, adding that the development would include a new floating production, storage and offloading vessel and 20 deepwater wells.
“However, the $10bn project has encountered difficulties. The tendering process has been delayed twice already. While Shell and its partners are still in negotiations with the government over production sharing contracts, the FID is, therefore, unlikely before the second half of 2020,” it said.
Other projects without the FID are ExxonMobil’s $6.2bn Bosi (126,784 bpd), Chevron’s $8.2bn Nsiko (95,685 bpd), ExxonMobil’s $8.2bn Owowo West (138,301 bpd), ExxonMobil’s $6.1bn Uge-Orso (99,532bpd) and Nigerian Agip Exploration Ltd’s $9.2bn Zabazaba (146,739 bpd).
According to the report, there are multiple gas projects worth nearly $5bn (led by Eni/Shell) that could achieve the FID in the coming years in Nigeria.
Announced gas projects that have not been sanctioned include Shell’s $1.5bn Gbaran Phase 3, Eni’s $1.1bn Samabri-Biseni and Shell’s $1.2bn Uzu.
Late last year, the IOCs and their local counterparts under the aegis of the Oil Producers Trade Section said the Federal Government’s planned increase in deepwater royalty would worsen Nigeria’s competitiveness and make $15bn of currently planned deepwater investments economically unviable.
They were reacting to the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill, which sought to introduce an additional price-based royalty on revenues above $35 per barrel, which ranges from 0.2 per cent to 29 per cent as the oil price increases.
In November, the President, Major General Muhammadu Buhari (retd.), signed the bill that amended the Deep Offshore (and Inland Basin Production Sharing Contract) Act after its passage by the National Assembly.
“The coronavirus crisis is adding to the uncertainties the global oil industry faces as it contemplates new investments and business strategies,” the Executive Director, International Energy Agency, Fatih Birol, said.
“The pressures on companies are changing. They need to show that they can deliver not just the energy that economies rely on but also the emissions reductions that the world needs to help tackle our climate challenge,” he added.